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Policy Responses to the Post-bubble Adjustments in Japan: A Tentative Review

Author

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  • Mori, Naruki

    (Bank of Japan)

  • Shiratsuka, Shigenori

    (Bank of Japan)

  • Taguchi, Hiroo

    (Bank of Japan)

Abstract

This paper provides a very tentative review of the monetary and prudential policy responses to the post-bubble adjustments in Japan. The adjustments after the collapse of the bubble have been prolonged due to (1) the rapid downward revision of the expected economic growth rate; (2) balance-sheet adjustments on the part of firms; and (3) the malfunctioning of the financial intermediary system stemming from its nonperforming-asset problem. We use four yardsticks, Marshallian k, Taylor rule, the equity yield spread, and the short-term real interest rate for assessing the monetary easing. The results suggest that the timing of policy reversal was swift and the magnitude of easing in the early phase could be viewed as broadly adequate for dealing with a normal business cycle. It is possible to argue that the effects of the bursting of the bubble might have not been sufficiently taken into account. It should be noted the outcome would not have differed greatly even if the drastic monetary easing that eventually took place had been decided at an earlier point in time without a fundamental cure of the nonperforming- asset problem. A considerable achievement of prudential policy in the period under review is that systemic risk was avoided with the cost being delayed in establishing a legal framework for handling troubled financial institutions and in organizing a comprehensive safety net. As a result of this delay, it took a long time to deal with the nonperforming- asset problem. This, in turn, posed a serious drag on the economy. Our preliminary conclusion about the lesson we should draw from this experience is the importance for the Bank of Japan of identifying the precise impacts of shocks on the economy as well as their transmission mechanism promptly and thereby minimizing adjustment costs. It should also be conducive for the Bank to address actively structural issues that may influence the effectiveness of its policy measures.

Suggested Citation

  • Mori, Naruki & Shiratsuka, Shigenori & Taguchi, Hiroo, 2001. "Policy Responses to the Post-bubble Adjustments in Japan: A Tentative Review," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 53-102, February.
    • Handle: RePEc:ime:imemes:v:19:y:2001:i:s1:p:53-102
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    Cited by:

    1. Kato, Ryo & Nishiyama, Shin-Ichi, 2005. "Optimal monetary policy when interest rates are bounded at zero," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 97-133, January.
    2. Andolfatto, David, 2003. "Monetary Implications of the Hayashi-Prescott Hypothesis for Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(4), pages 1-20, December.
    3. Oda, Nobuyuki & Okina, Kunio, 2001. "Further Monetary Easing Policies under the Non-negativity Constraints of Nominal Interest Rates: Summary of the Discussion Based on Japan's Experience," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 323-360, February.
    4. W. R. Garside, 2012. "Japan’s Great Stagnation," Books, Edward Elgar Publishing, number 14624.
    5. Morana, Claudio, 2004. "The Japanese stagnation: an assessment of the productivity slowdown hypothesis," Japan and the World Economy, Elsevier, vol. 16(2), pages 193-211, April.
    6. Anna Schwartz, 2003. "Asset price inflation and monetary policy," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 31(1), pages 1-14, March.
    7. Ravindra Prasad Pandey, 2004. "The Fallout of 9/11 on Asian Economies: Policy Options," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 16, pages 91-121, April.
    8. Shigeyoshi Miyagawa & Yoji Morita & Yoshitaka Sawada, 2007. "The Role of Central Bank in the Recession in the Case of Japan's Recession," Discussion Papers 17, Aboa Centre for Economics.
    9. Chen, Nan-Kuang & Chu, Hsiao-Lei & Liu, Jin-Tan & Wang, Kuang-Hsien, 2006. "Collateral value, firm borrowing, and forbearance lending: an empirical study of Taiwan," Japan and the World Economy, Elsevier, vol. 18(1), pages 49-71, January.
    10. Renee Fry, 2004. "International demand and liquidity shocks in a SVAR model of the Australian economy," Applied Economics, Taylor & Francis Journals, vol. 36(8), pages 849-863.
    11. Shiratsuka, Shigenori, 2001. "Is There a Desirable Rate of Inflation? A Theoretical and Empirical Survey," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(2), pages 49-83, May.
    12. Taylor, John-B, 2001. "Low Inflation, Deflation, and Policies for Future Price Stability," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 35-51, February.
    13. Hiroshi Nakaso, 2001. "The financial crisis in Japan during the 1990s: how the Bank of Japan responded and the lessons learnt," BIS Papers, Bank for International Settlements, number 06.
    14. Agarwal, Sumit & Chomsisengphet, Souphala & Liu, Chunlin & Ghon Rhee, S., 2007. "Earnings management behaviors under different economic environments: Evidence from Japanese banks," International Review of Economics & Finance, Elsevier, vol. 16(3), pages 429-443.
    15. Ippei Fujiwara & Naoko Hara & Naohisa Hirakata & Takeshi Kimura & Shinichiro Watanabe, 2007. "Japanese Monetary Policy during the Collapse of the Bubble Economy: A View of Policymaking under Uncertainty," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(2), pages 89-128, November.
    16. Nan-Kuang Chen & Hsiao-Lei Chu, 2003. "Collateral Value and Forbearance Lending," CEP Discussion Papers dp0603, Centre for Economic Performance, LSE.
    17. Shigenori Shiratsuka, 2001. "Asset prices, financial stability and monetary policy: based on Japan’s experience of the asset price bubble," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 261-284, Bank for International Settlements.
    18. Wako Watanabe, 2004. "Prudential Regulation, the Credit Crunch" and the Ineffectiveness of Monetary Policy: Evidence from Japan," ISER Discussion Paper 0617, Institute of Social and Economic Research, Osaka University.
    19. Maurice Obstfeld, 2009. "Time of Troubles: The Yen and Japan's Economy, 1985-2008," NBER Working Papers 14816, National Bureau of Economic Research, Inc.
    20. Andrew Filardo, 2004. "Monetary policy and asset price bubbles: calibrating the monetary policy trade-offs," BIS Working Papers 155, Bank for International Settlements.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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